Economic Policy in an environmentof growing uncertainty

Emerging market highlights

Recent market volatility and growing policy uncertainty in the US has forced monetary authorities in Emerging Economies to turn more hawkish.

The global economic environment continues to be robust, although negative tail risks have gone up.

Market overview

It’s been three years since the Fed started tightening monetary policy in 2015. Since then they have also introduced the strategy to start reducing the size of their balance sheet. The European Central Bank and the Bank of Japan are many steps behind the Fed in their own path towards policy normalization.

Financial markets have had plenty of time to adjust to the changing environment of monetary policy around the world. Emerging economies still are at an earlier stage of the expansionary cycle than the US and thus have more space to maneuver in a rising volatility environment.

But tighter financial conditions have created some difficulties for emerging economies, especially those with significant external vulnerabilities such as Argentina, Turkey and more recently India. Despite the strong fundamentals of EM there is a possibility that external risks could propagate to other countries that show similar vulnerabilities like South Africa and Indonesia. Our sentiment measurements of monetary policy in EM shows that authorities have been forced to turn more restrictive in order to anchor medium term expectations (see graph below).

Although EM has shown resiliency and adequate policy response in the current volatile market environment, the most significant challenge they face is the rising economic policy uncertainty mostly in the developed world, particularly the US.

We used our quantitative techniques to process 5,000 daily broker reports and explore the text content to quantify uncertainty of economic policy in the main economies. As the graph below shows, the perception of analysts is that uncertainty of economic policy appears to be the highest in the US, Canada and the European Monetary Union (see graph below).

Higher levels of policy uncertainty may be forcing some emerging economies to have a tighter monetary policy than they would otherwise prefer. Perhaps governments around the world should consider a predictable and transparent approach to economic policy making, just like the Fed has successfully been doing for the past few years.

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As of 9/30/18. Returns shown are annualized returns. Performance data quoted represents past performance and is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.Represented Indices:EM Equitiesrepresented by MSCI EM Index.Developed Marketsrepresented by MSCI World Index.Japanrepresented by MSCI Japan.Europerepresented by MSCI Europe.USrepresented by S&P 500 Index.Frontier Marketsrepresented by MSCI Frontier Index. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 30, 2018, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.

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